Property bubbles – a transitory phenomenon

Purpose – The purpose is to review what is known about property bubbles and their causes. Design/methodology/approach – The method has been to review the literature on bubbles in the property and other asset markets to examine their likely causes and whether there are specific aspects of the property market that make it more prone to bubbles. Findings – The property market has features that make it susceptible to bubbles, particularly inelasticity in supply and the absence of short selling. Bubbles can develop where there are heterogeneous beliefs. The way in which property tends to be financed helps to facilitate bubbles and transmit their effects onto the wider economy. Practical implications – The collapse in property prices after the financial crisis of 2008, like previous bubble collapses, has inflicted serious damage on the wider economy through losses of banks' capital, reductions in lending, and increased risk aversion. Understanding why bubbles exist offers the potential to devise policies to limit the impact of their collapse. Originality/value – Much of the literature on asset bubbles is based on securities markets. It is important to recognise the differences between the property market and securities markets, particularly how investment is financed.